It is hard to forge a successful contractor career without having to negotiate some tricky situations along the way – both those involving recruiters and clients, and a multitude of potential ‘administrative’ problems which may arise.
“Fools say that they learn by experience. I prefer to profit by the experience of others,” is a quote attributed to Otto von Bismarck.
With this immodest quote in mind, we’ve created a list of some classic mistakes you should try to avoid as an IT contractor (updated in September 2016).
1. Failing to make hay while the sun shines
As the last economic downturn demonstrated, good things don’t last forever. Could a Brexit wobble be on the cards still, despite the positive signals since the vote? When the going is good, and contract work is a-plenty, use these times to consolidate your rainy day fund, as you may need to fund yourselves in less plentiful times if you find yourself ‘on the bench’.
2. Starting work without a contract
If you’re not in receipt of a signed contract (as an IT contractor), or other written agreement (for freelancers), you shouldn’t start work. Make sure the client, agency (if applicable) and you are fully aware of the terms of the contract (duration, location, rates, etc.) and that all terms are in writing. Disputes can easily arise in the absence of a signed agreement, and you cannot rely on an oral agreement, as any party can dispute what may have been agreed. Read this legal view for further information.
3. Thinking you’re an accountant as well as a contractor
If you’re working via your own limited company, any ‘paperwork concerns’ you may have had before you started contracting soon disappear if you hire a reputable specialist accountant. Some contractors may have the ability to do their own accounts, but in our experience, they are a small minority. If you get your accounts wrong, or miss your company’s statutory deadlines, you could be faced with penalties, fines, and a lot of unnecessary contact with HMRC.
4. Being unrealistic about your annual earnings
If you estimate that you can earn £300 per day, how much do you think you’ll take home (turnover) in the average year? Before you multiply your daily rate by 5, and then 52, it’s time to be realistic. You’ll need to factor in public holidays (8 days), your own holidays (say 20 days), contingency for other types of absence due to illness, or random events (say 7 days), and you’ve already reduced the weeks you might work to a mere 45. And even then, what about time between contracts? You’ll also need to factor in the costs of working for yourself – see (10).
5. Using an offshore tax avoidance scheme
There are three ways to contract – to set up your own company, use a PAYE umbrella company, or be seduced by the wild take home pay claims of ‘tax planning schemes’. What may seem like an attractive proposition today could become a nightmare in a few years’ time when HMRC deems your offshore scheme to be illegal, and demand £50,000 from you retrospectively for unpaid taxes.
6. Burying your head in the sand over IR35
Although the number of contractors being selected for an IR35 investigation remains fairly low, the numbers quadrupled following HMRC’s overhaul of the way it administers IR35 back in April 2012 (256 investigations took place during the year to April 2013. More recent numbers don’t appear to be available at the time of writing). You will pay significantly more tax if your contracts are caught by IR35, so – as a minimum, submit your contracts for a professional review of the working and your working practices, and for peace of mind at a modest price, take out a tax investigation insurance policy.
7. Spending your company’s money
A limited company is a legal entity in its own right, and its funds are not ‘owned’ by its directors. When drawing down income from your company (in the form of dividends), you must ensure that the company has sufficient retained profit to cover any payments, otherwise such dividends can be challenged by HMRC. We’ve all heard of contractors who’ve been unable to pay their company’s VAT or Corporation Tax bills as a result of spending their company’s funds – and the consequences can be serious. This is another reason why appointing a decent contractor accountant should be one of your first priorities when starting out.
8. Embellishing your CV / LinkedIn profile
We’ve all done it at some stage – beefed up an uninspiring entry on our CVs, or exaggerated our competence at one skill or another. However, for those who may be considering something more drastic, be aware that recruiters are increasingly using pre-employment screening companies to vet potential job applicants. Make sure all versions of your CV match too – online, offline, and on LinkedIn, otherwise you may risk potential embarrassment, or awkward questions. Find out more in our contractor CV guide.
9. Not tailoring your job applications
Are you guilty of firing off identical applications for potential contract job openings? Sure, it may not be the most inspiring part of a contractor’s work lifecycle, but an uninspired generic application may well draw an equally uninteresting response from clients.
10. Who’s paying for your perks now?
Once you start contracting, you may realise how pampered you were in your past life as a permie. Interestingly, when you add up the benefits employers provide to their staff, together with other factors such as additional Employers’ National Insurance and pension costs they have to pay, it can actually be cheaper for many organisations to hire contractors than take on new permanent staff. Trouble is, once you’re on your own, you (or your company) will need to foot the bill for the costs associated with running a business, such as contributing to a pension scheme, professional indemnity cover, or insurance in case you fall ill and are unable to work. Fortunately, you should now be earning extra funds to cover these costs.
11. Running out of cash
The number one reason why small businesses fail has remained the same for generations – many run out of money. Not necessarily because they are not viable, but because they haven’t kept on top of their cash-flow management. Running a contracting business is no different – even if you’re only creating a single monthly invoice. If, say, two invoices in a row become ‘late’, you could face financial problems. Use an online accounting system (your accountant may already recommend one) which will let you invoice clients, and show you in real-time what your cash-flow situation is, when invoices are due, and if any need to be chased up. Before you start a new contract, make sure you ask your agent, or client, who you should invoice – including the name of a real person (not just ‘the accounts department’), their phone number and email address!
12. Being precious about job offers
As a contractor, you can’t always afford to be too picky about roles you apply for. You’re unlikely to find a ‘perfect’ role, in terms of skillset, industry, rate and location, so should be willing to compromise. In leaner times too, be aware of the opportunity cost of waiting for that ‘ideal role’, while passing up the opportunity to take on less desirable contracts which start right away.
13. Claiming illegitimate expenses
The rules which govern the expenses you can claim are complex, so you should tread carefully and ask your accountant first if you are unsure. For a business expense to be legitimate, it must have been incurred solely and exclusively for business reasons, and should not have a duality of purpose. For example, you can’t claim for anything which benefits you as an individual, e.g. gym membership. You also can’t claim for business use of a proportion of your residential broadband bill, as you would have incurred the costs regardless. Find out more in our concise guide to business expenses.
14. Being unprepared before an interview
Although contractor interviews are less intense affairs than those you attended as a permie, there is no excuse not to prepare in advance. Sure, you are being hired for the specific skills and experience you can bring to a project, but you should still find out as much as you can about your prospective client in advance. Any extra knowledge you can demonstrate could give you the edge on a similar candidate with the same skillset.
15. Hiring an accountant from your agent’s shortlist
Many recruitment agents will suggest you choose an accountant (or umbrella company) from a shortlist of providers. They may be fairly forceful in their recommendations too. You would be if you were getting a kickback! Novice contractors can hardly be blamed for choosing a service provider in this way, but the shortlist may not necessarily provide the right accountant for you – both in terms of price, and service. Try our list of service providers as a useful starting point.
16. Poor record keeping
The biggest complaint we hear from accountants about contractors relates to record keeping. Even with the best accountancy software and most qualified experts in place, a company’s accounts are only as good as the data provided by the client business. Without regularly updated invoice and expense records, it is impossible to provide a snapshot of your company’s financial health – or to work out how much retained profit there is upon which to draw dividends.
17. Missing your tax and filing deadlines
It may surprise you, but if you’re a limited company director, you alone are responsible for meeting your company’s annual filing and tax deadlines, and not your accountant. So, don’t bury your head in the sand. Make sure you know when your Confirmation Statement (previously Annual Return), and company accounts filing deadlines are. Make sure your VAT is paid within one month of your VAT quarter end, and for your personal tax – don’t miss the 31st January filing deadline. In all cases, the financial penalties can be severe – as you will be charged a penalty for late filing, as well as penalties and interest for late payment of any tax liabilities.
18. Not keeping up-to-date
For some reason, successive governments have taken a particular interest in the contracting sector. It’s hard to think of another industry upon which so much half-baked legislation has been heaped. Of course, IR35 is the most obvious tax measure all contractors should be aware of, but there are plenty more; changes to travel expenses for umbrella contractors, a clampdown on public sector contractors, the new dividend tax regime which was implemented in April 2016 to name just a few. Our site aside, there are many online resources for contractors which highlight potential threats to contractors (and occasional good news). So, make sure you minimise the chances of committing one of these contracting mistakes by keeping an eye on the news.
Visit our ‘starting out’ section for more tips on being a successful contractor.